If the estimates speak of a strengthening of real growth by 2,5%, thanks to domestic demand and lower public debt (10,4% of GDP, 2014 data) in the EU, the risks come from work and productivity.
According to a report by Deutsche Bank, Estonia's current account balance has improved significantly since 2007 and remains in positive territory, with surpluses projected at +2,1% of GDP in 2015 and +1% in 2016. Despite the weakness of the foreign demand from major trading partners (stagnation in Finland, recession in Russia), the economy continued to grow over the past year at an estimated rate of +1,3%, supported by domestic demand. In 2016, analysts expect real GDP growth to strengthen to 2,5% thanks to more capital from the 2014-2020 Plan, an increase in exports and a take-off in private consumption. Inflation is around zero due to the low level of prices, with negative effects on the real economy. The general price level is expected to grow by 0,1% in 2015 and by 1,5% this year. However, banks are profitable (RoA at 1,4% as of Q2) and well capitalised. Asset quality is high, with loans overdue by more than 30 days at a low percentage of 1,5% of the total (October figure). During 2015 the loan-to-deposit ratio decreased to 104% from the 170% recorded in 2008, confirming the significant improvement in the dependence on foreign financing.
Underlining the strong propensity for stability of Estonian fiscal policy, the public debt equal to 10,4% of GDP (year 2014) is the lowest in the EU and completely covered by liquid reserves. After a surplus of 0,7% of GDP in 2014, a budget deficit of 0,2-0,3% is expected in 2015/16 due to limited fiscal expansion (see PIT rate cut and wage hikes in the public sector). As published by the World Bank in the recent Doing Business report, the victory of the Estonian Reformist Party in the March elections guarantees the continuation of prudent, market-oriented policies. Despite this, Estonia remains vulnerable to external shocks, both through the commercial channel and the banking sector (of which 80% Swedish ownership). The partnership with Sweden is particularly important (represented by an 18% share of Estonian exports in 2014), followed by Finland (15%), Latvia (11%) and Russia (10%). The shock risk arising from a high share (46%) of short-term foreign debt is then mitigated by a significant share (19%) of intra-firm lending.
The recession in Russia and the restrictions imposed on some food products negatively affected Estonia's trade, with exports to the Russian market declining by 16% in 2014 and by 37% in the first ten months of last year, with repercussions and on total exports of -1,7% and -3,9% respectively. Even if a recovery is expected this year driven by the recovery in demand from EU partners, exports to Russia are likely to settle at modest levels.
But what weighs above all on growth prospects are demographic trends, where the negative migratory balance and a low fertility rate (1,5 in 2013) have led to a decline in the working-age population. Wages continued to grow above productivity (6,9% vs. 5%), which could erode the competitiveness of Estonian businesses. In this scenario, in addition to government efforts to increase labor participation, productivity gains will be crucial to maintain favorable growth prospects to continue Estonia's convergence with more advanced economies.
